- Competitive markets are those with an extremely high degree of competition
- Competition is based upon the number of firms competing in a market
- The degree of competition reduces as the market structure moves towards being more of a monopoly
Diagram: The Degree of Competition
The more firms in a market, the higher the level of competition
- The benefits of competition include price reductions and improved quality as firms strive to gain market share
- With more sellers in the industry, consumers enjoy a wider choice of goods and services
The Short- and Long-run Benefits of Competition
Short-run benefits
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Long-run benefits
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- Lower prices: competition causes firms to immediately lower prices for consumers in an attempt to gain market share
- More choice: more sellers equals more choice for consumers
- Customer satisfaction: firms compete using non-price competition strategies to gain consumers
- E.g After sales services, discounts, 2 for 1 offers, loyalty cards
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- Sustained lower prices: only the most efficient firms will survive in the long term and will be more allocatively efficient
- Technology improvements: Long term competition increases the pace of innovation as firms aim to gain a competitive advantage
- Eg. Renewable energy or pharmaceutical markets
- Long term quality: abnormal profits can be invested into R&D, to continuously innovate and improve the quality of goods/services in order to become recognised in a crowded market
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